Market announcement

Title

Financial results 9M 2007

Message

MANAGEMENT REPORT


General information

Merko Ehitus is a leading building corporation offering integrated solutions
since 1990, with branches currently in Estonia, Latvia and Lithuania. Largest
companies of the Group are SIA Merks (100%), UAB Merko Statyba (100%), Tallinna
Teede AS (100%), AS Gustaf (75%), OÜ Gustaf Tallinn (80%), AS Merko Tartu (66%),
OÜ Woody (100%) and AS Tartu Maja Betoontooted (25%).

On April 5 2007 AS Merko Ehitus acquired 75% holding of OÜ Fort Ehitus
(Registry Code 10722444). Principal activities of OÜ Fort Ehitus are hydraulic
engineering and pile works. The holding was acquired in order to strengthen
competence of the group in the field of pile works and hydraulic engineering
construction (http://www.baltic.omxgroup.com/market/?pg=news&news_id=213583).


Business operations

Group's revenue for the first nine months in 2007 were 3863.6 million kroons,
which constitutes an annual increase of 25.8%. 62.1% of the sales originated
from Estonia, 23.4% from Latvia and 14.5% from Lithuania. As compared with the
respective period in 2006, company's sales in Lithuania increased by 57.2%,
in Estonia by 24.6% and in Latvia by 14.6%.

Group's revenue in the third quarter of 2007 were 1367.9 million having
increased by 9.5 million kroons as compared to the same period in 2006.
The seasonality of road construction works had a positive effect on the
revenue and, similarly, underperformance in sales of housing projects had
a negative impact on the revenue.

Companies of the Group 9M 2007 consolidated revenue
(sales outside the Group) were (in thousand kroons and euros):

                                              9M 2007             9M 2006
                                            EEK      EUR        EEK       EUR
Estonian companies
   AS Merko Ehitus (parent company)      1 608 086  102 775   1 310 319   83 745
   AS Gustaf (75% partnership)             111 062    7 098      71 762    4 586
   OÜ Gustaf Tallinn (80% partnership)     102 936    6 579      97 740    6 247
   AS Merko Tartu (66% partnership)        181 502   11 600     172 451   11 022
   Tallinna Teede AS (100% partnership)    253 327   16 191     206 762   13 214
   OÜ Woody (100% partnership)             198 125   12 662     167 745   10 721
Latvian company
   SIA Merks (100% partnership)            779 876   49 843     713 260   45 586
Lithuanian company
   UAB Merko Statyba (100% partnership)    525 819   33 606     330 445   21 119


Compared to 9M 2006 the cost of goods sold increased by 30.5% and the marketing
and general administration costs 28.6% forming respectively 87.7% and 3.7% of
the sales. Increase in expenses exceeding the growth in income led to a lower
gross margin of 12.3% as compared to 15.5% in 2006.  Also, the operating profit
margin fell from 11.8% to 8.6%.

The net profit of the Group for 9M 2007 was 358.0 million kroons, with a yearly
growth of 6.8%. Due to the decrease of the gross and operating profit margin,
the net profit margin decreased during the reference period from 10.9% to 9.3%.

Group's net cash flow of the first 9 months of the year was -554.4 million
kroons, including cash flow from operating activities -647.6 million kroons,
from investing activities -52.9 million kroons and financing activities
+146.2 million kroons. The cash flow from operating activities were mostly
influenced by the change in inventories arising from development activities
(-569.2 million kroons) and change in trade receivables related to operating
activities (-234.4 million kroons). The negative cash flow of the period was
covered with additional loans (net cash flow of the period from borrowings
+275.1 million kroons) and liquid assets of the Group.


Construction market

Stricter loan terms of banks and negative prospects on the future economic
growth have decreased companies' investments enthusiasm and several projects
have been postponed for coming years. Despite strong growth during the first
six months of 2007 (own account construction works increased by 51.9% in
Lithuania, 45.9% in Latvia and 31.1% in Estonia in current prices as compared
to the first half of 2006), the prevailing trend of decreasing economic growth
in the area is likely to cause slow down also in the construction sector.

Construction prices continued soaring during the 3rd quarter, increasing by
23.8% in Latvia, by 14.6 % in Lithuania and by 12.1% in Estonia, including
labour costs increase of 40.4% in Latvia and 21.1% in Estonia as compared to
the same period in 2006. However, simultaneous decrease in demand and better
availability of building materials and workforce are likely to create better
environment for stabilizing construction prices in the near future.

Pessimistic and lethargic mood was prevailing in the housing market. The
number of apartments put on the market increased and prices in different
parts of the region differed more clearly. The selling period of apartments
is now longer due to changes in the market. Reduced financial resources
and ability to handle liquidity risks due to the longer selling period
will be the challenges for developers in near future. Companies' strong
capitalization and availability of internal liquid resources will have
a crucial influence to companies further succeed.


The ratios and calculation methods characterizing the operating activities
of the Group
                                            2007 9 months      2006 9 months

Net profit margin                                   9,3 %             10,8 %*
Operating profit margin                             8,6 %             11,8 %
Return on equity per annum                         27,9 %             36,5 %
Return on assets per annum                         13,5 %             17,7 %
Current ratio                                       2,1                2,0
Equity ratio                                       47,0 %             47,5 %
General expenses to sales                           3,7 %              3,7 %
Staff costs to sales                                9,5 %              7,4 %
Average number of full-time employees               995                841

* less extraordinary profit

Net profit margin: Net profit* / Sales
Operating profit margin: Operating profit / Sales
Return on equity: Net profit x 4/3* / Average equity during the period*
Return on assets: Net profit x 4/3* / Average assets during the period
Current ratio: Current assets / Current liabilities
Equity ratio: Owners equity* / Total assets
General expenses to sales: General expenses / Sales
Staff costs to sales: Staff costs / Sales

* calculated from the share of the parent company's shareholders

In 30.09.2007, the number of employees in the Group's service was 1099,
including 1064 full-time employees. The number of the Group's employees
increased by 26.2% (228 new employees were recruited). The gross remuneration
paid to full-time personnel in 9 months 2007 amounted to 290.6 million kroons
an increase of 51.5% compared to previous year.


Shares and shareholders

The shares of Merko Ehitus are listed in the main list of Tallinn Stock
Exchange. In 2007 9M the number of transactions with Merko Ehitus' shares was
3841, during which 4.5 million shares changed ownership and the turnover of
the transactions was 1588.3 million kroons. The cheapest bargain with a share
was 289.78 kroons and highest 402.12 kroons per share. The closing share price
with a state of 28.09.2007 was 293.22 kroons.


INCOME STATEMENT III quarter 2007
consolidated, unaudited in thousand EEK and EUR

                                           EEK                   EUR
                                 IIIq 2007   IIIq 2006  IIIq 2007  IIIq 2006

Revenue                          1 367 855   1 358 336     87 422     86 813
Cost of goods sold              (1 198 290) (1 140 620)   (76 585)   (72 899)

GROSS PROFIT                       169 565     217 716     10 837     13 914

Marketing expenses                  (7 788)     (4 196)      (498)      (268)
Administrative and general expenses(42 725)    (34 178)    (2 731)    (2 184)
Other operating income               2 856       4 612        183        295
Other operating expenses            (1 393)     (1 919)       (89)      (123)

OPERATING PROFIT                   120 515     182 035      7 702     11 634

Financial income and expenses
from stocks of subsidiaries              0       2 324          0        149
Financial income and expenses from stocks of
associate comp. and joint ventures   8 711       7 640        557        488
Financial income and expenses from
other long-term financial investments    0           2          0          0
Interest expense                    (7 827)     (7 562)      (500)      (483)
Foreign exchange gain               (3 317)       (872)      (212)       (56)
Other financial income               4 225       1 656        270        106
Other financial expenses               (68)         (0)        (4)        (0)
Total financial income and expenses  1 724       3 188        111        204

PROFIT BEFORE TAX                  122 239     185 223      7 813     11 838

Corporate income tax expense        (3 267)    (14 871)      (209)      (950)

NET PROFIT FOR CURRENT PERIOD      118 972     170 352      7 604     10 888
  incl. net profit attributable
        to equity holders of
        the parent company         116 023     166 314      7 415     10 630
        minority interest            2 949       4 038        188        258

Earnings per share for profit attributable
to the equity holders of the parent company
(basic and diluted, in EEK and EUR)   6,55        9,40       0,42       0,60


INCOME STATEMENT 9M 2007
consolidated, in thousand EEK and EUR
                                           EEK                   EUR
                                   9M 2007     9M 2006    9M 2007    9M 2006

Revenue                          3 863 605   3 071 042    246 929    196 275
Cost of goods sold              (3 388 412) (2 596 357)  (216 559)  (165 937)

GROSS PROFIT                       475 193     474 685     30 370     30 338

Marketing expenses                 (20 244)    (15 469)    (1 294)      (989)
Administrative and gen. expenses  (124 180)    (96 831)    (7 937)    (6 189)
Other operating income               5 345      14 659        342        937
Other operating expenses            (4 338)    (15 493)      (277)      (990)

OPERATING PROFIT                   331 776     361 551     21 204     23 107

Financial income and expenses
from stocks of subsidiaries              0       2 325          0        149
Financial income and expenses from stocks of
associate comp. and joint ventures  61 486      12 116      3 930        774
Financial income and expenses from
other long-term financial investments    0           7          0          0
Interest expense                   (14 355)    (10 265)      (917)      (656)
Foreign exchange gain               (3 179)     (3 766)      (203)      (241)
Other financial income               9 295       5 245        594        336
Other financial expenses               (70)         (0)        (4)        (0)
Total financial income and expenses 53 177       5 662      3 400        362

PROFIT BEFORE TAX                  384 953     367 213     24 604     23 469

Corporate income tax expense       (18 346)    (25 650)    (1 173)    (1 639)

NET PROFIT FOR CURRENT PERIOD      366 607     341 563     23 431     21 830
  incl. net profit attributable
        to equity holders of
        the parent company         358 024     335 275     22 882     21 428
        minority interest            8 583       6 288        549        402

Earnings per share for profit attributable
to the equity holders of the parent company
(basic and diluted, in EEK and EUR)  20,23       18,94       1,29       1,21


BALANCE SHEET AS OF 30.09.2007
consolidated, in thousand EEK and EUR
                                       EEK                      EUR
                             30.09.2007   31.12.2006  30.09.2007  31.12.2006
ASSETS
Current assets
Cash and cash equivalents       120 199      676 143       7 682      43 213
Trade and other receivables   1 342 235      860 531      85 785      54 998
Inventories                   1 912 072    1 356 734     122 204      86 712
Assets held for sale                  0          733           0          47
Total current assets          3 374 506    2 894 141     215 671     184 970

Non-current assets
Long-term financial investments 274 937      215 866      17 571      13 796
Investment property               9 358        3 900         598         249
Property, plant and equipment   170 140       90 445      10 874       5 781
Intangible assets                13 097       10 177         837         650
Total non-current assets        467 532      320 388      29 880      20 476

TOTAL ASSETS                  3 842 038    3 214 529     245 551     205 446

LIABILITIES AND OWNERS' EQUITY
Current liabilities
Borrowings                      365 198      283 792      23 340      18 138
Trade and other payables      1 092 718    1 100 264      69 837      70 320
Government grants                 1 482        1 498          95          96
Short-term provisions            88 445       33 517       5 653       2 142
Total current liabilities     1 547 843    1 419 071      98 925      90 696

Non-current liabilities
Loans, bonds and
finance lease liabilities       382 307      159 336      24 434      10 183
Other long-term payables         10 440       10 351         667         662
Long-term customer prepayments   49 608       12 925       3 171         826
Total non-current liabilities   442 355      182 612      28 272      11 671

Total liabilities             1 990 198    1 601 683     127 197     102 367

Equity
Minority interest                27 662       18 904       1 768       1 208
Equity attributable to equity holders of the parent company
Share capital                   177 000      177 000      11 312      11 312
Statutory reserve capital        17 700       17 700       1 131       1 131
Currency translation adjustment  (9 639)      (5 751)       (616)       (368)
Retained earnings             1 639 117    1 404 993     104 759      89 796
Total equity attributable to equity
holders of the parent company 1 824 178    1 593 942     116 586     101 871
Total equity                  1 851 840    1 612 846     118 354     103 079

TOTAL LIABILITIES AND EQUITY  3 842 038    3 214 529     245 551     205 446


Alar Lagus
Member of Board
+372 6 805 109